Revealing Structured Heterogeneity

Abstract

In this paper, we study models of restricted heterogeneity. While the random utility model allows for arbitrary heterogeneity among rational types, we consider the case when an analyst ex-ante restricts the set of rational types to some smaller set of allowable types. We study the behavioral content, the model fit, and the identification properties of restrictions of this form. We find that all three of these can be connected through a common value function that is constructed from observable data. Consistency with a model of restricted heterogeneity is characterized by this value function achieving a value of one, while model fit is given by a value that is potentially less than one. The partially identified set for a given model of restricted heterogeneity is characterized by way of the subdifferential of this value function.